Apportionment

More About Apportionment

Tax Analysts provides news, analysis, and commentary on apportionment tax methods, more commonly referred to as formulary apportionment. In general, apportionment is the way in which a corporation’s income, gain, deduction, loss, and credit are allocated between multiple taxing jurisdictions. Corporations that are members of a controlled group may also agree to an apportionment tax methodology or an apportionment plan that will outline how taxable income, income tax, and some tax benefits get allocated between members as if they were a single corporation.

Formulary apportionment comes up in the context of apportioning income globally across countries. In global formulary apportionment, which is a concept and not a reality, a multinational corporation would divide its global profits by a formula that takes into account in which countries its costs, assets, payroll, and sales are located in order to determine which country has taxing jurisdiction over what portion of the corporation’s profits. The formula is mechanical across all taxpayers and determined in advance and not upon consideration of specific facts and circumstances.

Many multinational corporations hold out global formulary apportionment as a more administrable alternative to the current application of the arm’s length principle. Like apportionment, the arm’s length principle, which comes up in connection with the section 482 transfer pricing concept, informs how profits are divided between related taxpayers and is a guard against income shifting.

Formulary apportionment is also used at the state-level. The Uniform Division of Income for Tax Purposes Act (UDITPA) states list incorporates formulary apportionment principles to determine what portion of a business’s income should be taxed in a particular state.